|
|
|
|
CIAO DATE: 04/05/07
Staying Competitive: U.S. Economic Policy
Review by Ronald McKinnon
Fred Bergsten and the Institute of International Economics, The United States and the World Economy: Foreign Economic Policy for the Next Decade. Washington, DC: IIE Press, 2005, 488 pp. $26.95.
The United States and the World Economy: Foreign Economic Policy for the Next Decade suggests policy changes to resolve the economic problems of the United States and the implications of these suggested policies for the rest of the world. The authors are drawn from the Institute for International Economics (IIE). C. Fred Bergsten, director of the IIE, leads with a 50-page essay entitled "A New Foreign Economic Policy for the United States," whose title aptly explains its content. The meat of the book lies in Bergsten's piece, with the rest of the thirteen chapters further developing some of Bergsten's ideas.
In proposing an agenda for improving U.S. foreign economic policy for the next decade, Bergsten is often on the side of angels. He wishes to counter the domestic protectionist backlash against globalization by pushing Congress to extend the president's trade promotion authority in order to complete the multilateral Doha round of negotiations under the World Trade Organization (WTO) by 2007-including cutting agricultural protectionism everywhere. He backs this assertion with the convincing argument that per-capita income in the United States has benefited enormously from previous trade negotiations and that this could continue into the future.
A purist might quibble with some of the institutional mechanisms that Bergsten proposes for bolstering America's free trade ethic. He, along with Lori Kletzer and Howard Rosen in a follow-up essay, wants to greatly expand trade adjustment assistance for workers harmed or displaced by manufactured imports or outsourcing in the service area. However, there are potential problems with the large, new bureaucracies that may be required for such expansion. For example, these new establishments might struggle to differentiate between trade-related distress and pure distress. Another option would be to strengthen general unemployment, welfare, and educational benefits in the face of rapid technical change, whether the distress is traderelated or not. More questionable is his support for new bilateral or regional trade agreements that, of course, cut across the multilateral grain of the WTO. Most dubious of all is his proposal for a human capital tax credit, as discussed in the otherwise excellent essay by Catherine Mann on the outsourcing of services. This is a particularly dangerous prescription when U.S. fiscal deficits are already out of control.
On the other hand, Bergsten is second to no one in raising the alarm over escalating federal fiscal deficits and their link to rising current account deficits in the U.S. balance of payments. That theme is strongly reiterated in Michael Mussa's essay, "Sustaining Global Growth while Reducing External Imbalances." Indeed, all of the authors agree that meager saving by American households and negative saving by the federal government is the root cause of the trade deficit. Bergsten and Mussa express their hope that the fiscal deficit will be reduced in the near future, but Mussa muses that this may not happen because of the U.S. demographic problem with rising Medicare expenses.
Whether the U.S. saving deficiency increases or decreases in the future, these authors-joined by Nicholas Lardy in his essay on China and, most vehemently, by Morris Goldstein in his essay on the international financial architecture- all advocate a large devaluation of the dollar as a first step in reducing the U.S. current account deficit. Unfortunately, since 2001, the dollar has depreciated significantly against the currencies of the major industrial countries; for example, it has declined by over 30 percent against the euro. Thus the IIE authors all focus on the East Asian bloc's ability to keep the renminbi (Chinese paper currency) stable at 8.28 yuan per dollar since 1994, a feat that has been possible in large part because of China's growing strength. They suggest that if China appreciates the renminbi by 20 to 25 percent, the U.S. current account deficit might be reduced by 1 to 2 percent depending on whether China's appreciation induced similar appreciations in other East Asian countries.
Quite incredibly, none of the authors in this far-ranging volume provide any econometric support-or even a theoretical model in a technical appendix-to demonstrate the quantitative impact of a 20 to 25 percent appreciation of the renminbi on China's trade surplus or on the U.S. trade deficit. Astonishingly, this unsubstantiated projection of the impact of an appreciation of China's currency is highlighted as a central conclusion in the volume's Executive Summary.
Ronald McKinnon is William D. Eberle Professor of International Economics at Stanford University. He is also author of Exchange Rates Under the East Asian Dollar Standard: Living with Conflicted Virtue (MIT Press, 2005).